Accounting Business Reporting for Decision Making

CHAPTER 11 Costing and pricing in an entity 497

Required

As a management accountant for the manufacturing entity, how would you respond to the com-

ments made by Bob Sharp?

11.36 Contrast cost allocation using a volume-based cost driver and activity-based cost

drivers    LO1, 2, 3, 4

Court and Kneigh is a public accounting entity that offers auditing and tax services to local small

entities. The partners are in dispute over who contributes the greater amount to the entity’s profit.

The area of contention is the allocation of indirect costs. The tax partners argue for allocating

indirect costs on the basis of 40 per cent of professional labour dollars, while the audit partners

argue for implementing an activity-based approach to indirect cost allocation. The partners agree

to use next year’s budgeted data for the purposes of analysis and comparison. Budgeted direct

costs are $1 500 000 for audit services and $1 000 000 for tax services. The entity’s accountant

has provided the following indirect cost analysis.

Activity cost

pool Cost driver

Estimated

indirect cost

Expected use

of cost driver

Expected use of cost

drivers per service

Audit Ta x

Employee training Professional labour

dollars

$209 000 $1 900 000 $1 000 000 $900 000

Secretarial

services

Number of reports/

forms

$ 76 200 2 500 600 1 900

Computing Number of minutes $204 000 60 000 25 000 35 000

Rental Number of

employees

$142 500 38 20 18

Travel Travel requisitions $128 300 Directly traced $ 86 800 $41 500

The analysis has revealed that travel costs can now be considered a direct cost to the audit and

tax services. Travel requisitions are to be used as the source documentation to trace the costs.

The only other direct costs are professional labour costs, and these are shown in the table.

Required

a. Draw a diagram contrasting the current and proposed structure of the costing system.

b. Using the current approach to cost allocation, compute the total indirect cost assigned to each

service.

c. Using the activity approach to cost allocation, compute the activity cost rates.

d. Assign the indirect costs to each service, using the activity cost rates calculated in (c) above.

e. Calculate the total cost for both audit and tax services under each cost allocation method.

f. Write a report to the partners advising which cost allocation method you would recommend.

11.37 Selection of a costing system to support financial reporting and decision

making    LO3, 5

Teninarow Industries manufactures headsets to make phones hands free. In 2017, the entity

produced 20 000 units of which 16 000 were sold. The following costs were recorded for 2017.

Direct material

Direct labour

Manufacturing overhead

Selling expenses

Administrative expenses

$ 800 000

400 000

1 000 000

100 000

160 000

The determination of the inventoriable product cost for Teninarow Industries is relatively simple,

as the entity produces only one product.